Russian gas cut ticking time bomb, not immediate threat

Russia’s decision to cut gas supplies to Ukraine carries few immediate risks for European consumers, analysts say, with plenty of gas already in storage and little demand during summer.

After two previous cut-offs, Europe has been seeking to diversify its energy sources and Kiev is already turning to Brussels for help with suppling gas.

But analysts warn that could change when reserves start to run low amid the winter chill, forcing Europe to look for alternative energy sources and threatening Ukraine’s fragile economy.

– What is the immediate impact for Europe?

Russia’s state energy giant Gazprom says it will continue to supply Europe with gas via Ukraine’s pipeline system.

About 15 percent of gas consumed in Europe is pumped by Russia through its conflict-torn neighbour.

Some in Brussels fear Ukraine may start to siphon off supplies destined for Europe when the bitter cold of winter starts to bite, as it did when Russia turned off the tap in 2006 and 2009.

EU Energy Commissioner Guenther Oettinger has warned that Europe “would have a problem with a cold winter”.

Volodymyr Omelchenko, an analyst with the Razumkov Centre in Kiev, pointed out that “Ukraine cannot guarantee transit long-term without guarantees of its own domestic supply”.

“Russia went ahead with this knowing that shutting off gas to Ukraine will eventually lead to disruption of transit to European countries,” he added.

Bank of America Merril Lynch analysts say there is little risk of that happening in the short-term as Ukraine currently has ample supplies of around 13 billion cubic metres of gas in storage.

Moritz Bonn, an analyst with the Centre for European Policy, also points out that both Europe and Ukraine need little gas for heating during the northern hemisphere summer.

“The situation is very different from 2009 due to the season,” he said.

The EU has reduced its dependance on Russian gas flowing via Ukraine since the last dispute, though some countries such as Slovakia and Bulgaria remain heavily reliant on those supplies, Bonn added.

– How long will the conflict last?

Despite calls from Brussels to continue talks, Kiev and Moscow have dug in their heels and filed opposing lawsuits in the Stockholm arbitration court that could lead to years of litigation.

Analysts say the two are unlikely to reach an agreement on politics — or gas — while violence continues to rage in eastern Ukraine.

“It’s summer and the issue of gas is not critical so (Ukraine) will attempt to resist,” said Nikolai Petrov, an analyst with the Higher School of Economics in Moscow.

“The Kremlin has no interest in solving the Ukrainian crisis, rather it is searching for ways to exacerbate the problems of the Ukrainian authorities.”

– What are the risks for Ukraine?

Ukraine is already scrambling to find alternatives before its reserves run short, including a so-called “reverse flow” from European countries that buy gas from Russia.

Gazprom has branded the practice illegal, and on Monday the gas giant threatened to reduce exports to any countries that agreed to it.

The EU disagreed, and on Tuesday Brussels said it is looking at “possibilities” for supplying Kiev.

Many European utilities have so far remained quiet on the issue, refusing to complicate their relations with Russia.

But even a deal with Europe would not be enough for Kiev. Ukraine needs 50 billion of cubic metres of gas annually, 30 billion of which comes from Russia.

At the moment, reverse flow shipments are “insufficient to provide Ukraine with gas,” said Ukrainian Prime Minister Arseniy Yatsenyuk.

Capital Economics analysts pointed out that Gazprom’s decision “adds to the forces pulling Ukraine’s fragile economy into an ever-deepening recession”.

– How will it impact EU-Russia gas relations?

While the gas cut-off clearly poses a threat to Ukraine and Europe, energy giant Russia could also be hurt in the long-term.

Since Moscow turned off gas exports in 2006, the EU has made efforts to diversify its energy reliance on Moscow, said Bonn of the Centre for European Policy.

Gazprom, meanwhile, remains heavily reliant on Europe, with an estimated 60 percent of revenues coming from EU buyers.

“While there would be few winners from another ‘gas war’ between Russia and Ukraine, Russia has more to lose than many assume,” Capital Economics said.

The bloc has also moved to suspend construction of Kremlin-backed South Stream pipeline, which would connect Russia with southern Europe via the Black Sea.

Moscow-based analyst with Sberbank Investment Research Valery Nesterov argued that “gas friendship between Europe and Russia is inevitable for the next 10-15 years, although it is done out of necessity”.

“Europe won’t be able to reduce gas dependance on Russia before then.”

The issue will be discussed during an EU summit on June 26-27.

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